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Political Uncertainties Could Keep Precious Metals Positive

Strengths

Palladium is starting this year as the best performer among the precious metals, heading for its biggest gain since March, reports Bloomberg. The metal rose 11.17 percent for the week on bets that carmaker demand will grow following positive U.S. and Chinese manufacturing data. Pollution control in China remains a problem, but in the U.S. some auto manufacturers are going to idle some auto plant capacity as dealer inventories are too high.

Gold traders and analysts surveyed by Bloomberg this week were the most bullish in a year. Those surveyed cited worries over U.S. and European political developments as well as expectations for stronger demand in the Lunar New Year. “Chinese New Year this year will fall on the last week of January, which suggests jewelry purchases are likely to hit their season peak in the next couple of weeks,” Vyanne Lai of the National Australia Bank said.

Investors spooked by a pullback in Treasury yields, saw the U.S. dollar run into a brick wall on Thursday, reports Bloomberg. According to traders, long positions were flushed out from the crowded trade as the dollar broke through a 21-day moving average support level. “The growing backlash against the dollar coincides with more-sober outlooks on whether President-elect Donald Trump’s plans to boost fiscal spending will achieve rapid reflation,” continues another Bloomberg note. As the chart above shows, the net long position is approaching earlier highs and this typically sets the market up for a correction.

Weaknesses

The worst performing precious metal for the week was gold with just a 1.79 percent rise; however, this is the second week of positive performance for gold following seven weeks of losses.

Investors pulled $2.27 billion out of the world’s largest ETF backed by gold in December, which is the biggest loss since May of 2013, reports Bloomberg. A look at BullionVault’s Gold Investor Index (measuring the balance of client buyers against sellers), also looks a bit dimmer. The index fell to 55.5 versus 59.3 in November, retreating from a five-year high.

Gold imports in India have hit a 13-year low, according to a Rediff.com article. Although gold demand increased immediately following the government’s demonetization of 500 and 1000 rupee notes in November, the metal fell sharply in December. In tonnage terms, 2016 gold imports were the lowest since 2003, according to GFMS TR. The organization has estimated the official gold import in 2016 at 492 tonnes, the article continues.

Opportunities

RBC Capital Markets notes that according to its seasonality analysis on gold, the strongest and most consistent positive price performance for the metal is observed in January and February. The group has re-profiled its quarterly forecasts for 2017, putting gold at $1,245 an ounce. “Overall, in our view, a cautious march higher will occur, but gold prices will likely be at least partially held back by some macro headwinds,” the report continues.

UBS says that 2017 will be a year that holds plenty of macro and political uncertainties, which should keep precious metals on investors’ radars. The U.K. Supreme Court decision to trigger Article 50, the inauguration of U.S. President-elect Trump and his first 100 days in office, the French and German presidential elections, and the 2017 Indian budget are all major political events that the group highlights as potential market movers.

Chronically low productivity and labor force growth will make it difficult for central banks to contain inflation once it does begin to accelerate, writes BCA Research in its year-end report. Global bond yields will rise only modestly in 2017, the group believes, but could begin to surge as the decade wears on. In the report entitled “The Long and Winding Road to Stagflation,” the group goes on to say: For the next few years, the likelihood of a disorderly rise in inflation is extremely low. Beyond then, however, the risk is that inflation surprises to the upside, perhaps significantly so.

Threats

In a report released Friday, ABN Amro said that gold could sink below $1,100 an ounce on the back of strong U.S. data. “As long as U.S. real yields rise, and there are no major inflation fears, gold prices will go lower,” the bank says. Analyst Georgette Boele added that the last leg of a powerful rally in the dollar is in full swing, aided by higher equities, expectations of further rate hikes, and expectations of a strong uplift in the U.S., reports Bloomberg.

There are numerous factors creating a more positive environment for gold right now, writes ICBC Standard Bank. Trump’s increasingly protectionist Tweets, the U.S. 10-year yields falling by 24 basis points, and a jump in European CPI, have all contributed to the metal being up almost 5 percent from its December lows. “However, we think this is a false dawn for gold.” Despite this near-term sentiment for the metal, the bank says a more sustainable turn in gold will likely have to wait until mid-year, by which time “we think disappointment on the lack of policy delivery by a congested Congress and the U.S. debt ceiling will start to dominate the news flow.”

HSBC believes that one of the puzzling things about December’s FOMC meeting was the contradiction between the unchanged growth and inflation forecasts for 2017, and the rise in the median projection for rate hikes this year, from two to three. The meeting minutes show that the outcome of the presidential election led many policymakers to change their view regarding the “risks” to their forecasts. An article on Business Insider even notes the disagreement seen within the Fed, based on the meeting minutes. The article states, “The most salient discord appeared to be between the view of Fed economists, or ‘staffers’ and the sitting policymakers.” HSBC also noted in its report that these minutes show the policymakers’ uncertainty about the fiscal outlook, which could suggest there is no intention to hike the federal funds rate in the near-term. HSBC continues by explaining that it sees the next rate hike taking place in June, followed by another in December.

Frank Holmes is the CEO and Chief Investment Officer of U.S. Global Investors. Mr. Holmes purchased a controlling interest in U.S. Global Investors in 1989 and became the firm’s chief investment officer in 1999. Under his guidance, the company’s funds have received numerous awards and honors including more than two dozen Lipper Fund Awards and certificates. In 2006, Mr. Holmes was selected mining fund manager of the year by the Mining Journal. He is also the co-author of “The Goldwatcher: Demystifying Gold Investing.” Mr. Holmes is engaged in a number of international philanthropies. He is a member of the President’s Circle and on the investment committee of the International Crisis Group, which works to resolve conflict around the world. He is also an advisor to the William J. Clinton Foundation on sustainable development in countries with resource-based economies. Mr. Holmes is a native of Toronto and is a graduate of the University of Western Ontario with a bachelor’s degree in economics. He is a former president and chairman of the Toronto Society of the Investment Dealers Association. Mr. Holmes is a much-sought-after keynote speaker at national and international investment conferences. He is also a regular commentator on the financial television networks CNBC, Bloomberg and Fox Business, and has been profiled by Fortune, Barron’s, The Financial Times and other publications. Visit the U.S. Global Investors website at http://www.usfunds.com. You can contact Frank at: editor@usfunds.com.